Today's interest rate rise to 5.75% is likely to hit companies hard – not least as the traditional practice of offsetting interest rate rises by lowering inventory levels no longer remains an easy option in the wake of increasingly complex supply chains and extended lead times.
The warning comes from Fraser Ironside – Barloworld Optimus' Global Business Development Director for supply chain design – who said today (Thursday) that the changing face of global production has left many firms more vulnerable than ever to the impact of corresponding rises in inventory-holding costs.
“As even small interest rate rises now impact to a far higher degree than ever before, the effect of today's Bank of England decision – the fifth rise since August last year – could prove to be just too much of a burden for many” he warned.
He added that while companies would have traditionally weathered the storm by lowering inventory holdings in past years, increasing globalisation has led to firms with overseas manufacturing or sourcing bases now counting the cost of extended supply chain lead-times, and less-flexible inventories.
“It's a trend that's created a situation in which even a fraction-percentage interest rise can now equate to millions of pounds – potentially, the difference between financial success and failure” he said.
According to Fraser Ironside, inventory holding costs are generally held to range between 15% of inventory value for slow-moving products and as much as 45% for fast-moving lines such as fashion goods.
“Take a company with a £500 million inventory, for instance – not uncommon for those in the FTSE100 these days. For such a company, inventory holding costs at 15% could realistically be equated to £75 million per annum when costs surrounding capital, obsolescence, storage and handling, spoilage and pilfering, damage and insurance are taken into account.
“A single percentage interest rise escalates that figure by a further £5 million, so today's rise could be seen to equate to £1.25 million additional costs. Even for companies with a £5 million inventory, a single point interest rise adds £50,000 to the holding cost. The figures at stake are just staggering”
He added that today's Bank of England decision underlines the increasing need for powerful inventory optimisation and supply chain software…
“In an increasingly unstable business world, the traditional techniques no longer apply and software now holds the key as the antidote to such external economic pressures. CEOs and CFOs need to understand how future economic scenarios will impact their supply chain costs and should be deploying the appropriate solutions to consider those scenarios before they happen” he said.
And he warned, today's rates hike may not be the last this year, with some observers already citing a further hike to 6% as a distinct possibility over coming months, sparked-off by surging worldwide inflation.
In the last few weeks, the European Central Bank, Reserve Bank of New Zealand and South Africa's Central Bank all raised their interest rates, Australia warned of an impending rise, and though today's Bank of England hike to 5.75% is the fifth rate rise since last August, many industry insiders believe that further rises are all-but inevitable.
According to Fraser Ironside, a major question mark also hangs over global prospects for 2008 – with most observers forecasting even higher levels as banks struggle to ward-off global inflationary pressures with warning signals being sounded over increasing oil and raw materials prices, rising global food prices as farmers switch to produce crops for the rising bio-fuel market, inflationary wage claims, growing demands for carbon neutrality and continued consumer growth in Asia, notably China and India.
In April this year, Barloworld Optimus, part of the Barloworld group with a $7 billion turnover and 26,000 employees worldwide – posted its best results ever, boosted by record sales of its world-beating software applications CAST and Optimiza.
CAST – with more than 350 licences world-wide and over 1300 trained users – is already viewed as market-leader in Europe and increasingly in the US. Used widely by third party logistics, manufacturing, consulting and retail companies to evaluate and identify different supply chain strategies, in turn leading to significant cost savings and service improvements, the tool allows customers to design and configure the optimal supply chain infrastructure.
Optimiza is an advanced inventory optimization application that, unlike traditional inventory re-ordering systems, takes into account the unique supply and demand characteristics of its supply chain, effectively reducing stock levels by between 15-50% while increasing service levels by as much as 20%.
Details of the twin software packages are in the company's website www.barloworldoptimus.co.uk